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Do Rewards Programs Drive Real Loyalty? Zappos Says “Yes” — If Focused on Engagement 

Bob Thompson | Oct 11, 2016 849 views 6 Comments

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The Zappos logo says it all: “Powered by Service.” The company has built a cult-like following by making “wow” customer service a differentiator. One of the most amazing stories I’ve heard is a call that lasted for 8 hours simply because the customer wanted to chat, and Zappos doesn’t push its service reps to keep calls short.

If loyalty is already baked into the company culture, why does Zappos feel the need to offer a new rewards program? Here’s a graphic showing what it offers:

Source: Zappos

Source: Zappos

Do Rewards (“Points”) Programs Increase Loyalty?

This has been debated many times on this community over the years. I’ll try to briefly sum up as follows:

  • Yes: Points are a way of giving something of value to a customer, basically a form of discounting.

    And who doesn’t like getting a good deal, especially from brands that you already like? I’m a fan of Ace Hardware, so when they invited me to open a loyalty account (something I rarely do), I happily accepted. Periodically I get emails with coupons, discount offers and other specials targeted to “members.”

  • No: You can’t buy “real” loyalty with points.

    Meaning, an emotional connection with the brand. I agree with that; if the only value of a loyalty program is to offer up deals, then it will only attract price shoppers. Unless that the kind of customer base you want, it’s a hard path to take.

So, it depends on what you mean by loyalty, and what your rewards program offers.

Building Loyalty with Digital Consumers

While Zappos clearly wants to differentiate based on exceptional service, how do you build loyalty with customers who never need to contact customer service?

That’s the problem Zappos was trying to solve, according to director of marketing Kedar Deshpande, who manages loyalty marketing for the company. Deshpande says that for the 95%+ of customers that don’t contact customer service, this program will encourage engagement and “elevate the value proposition” of Zappos.

What makes the program unique versus other retails is that points are not just earned with purchases — a core feature of all “transactional” loyalty programs. The Zappos program will encourage customers to engage by logging in to the web site, writing reviews, or downloading an app.

The goal is to “increase interactions, not just transactions,” says Deshpande. Of course, they do expect that over time a deeper level of engagement (more interactions) will lead to high customers satisfaction, and therefore more purchases. That’s the “bet” Zappos is making, just as it did with customer service.

Designing the Loyalty Program for Payback

Customers were an important source of input to Zappos — giving suggestions many times that Zappos should offer a point program like other retailers. But Zappos didn’t want to be like other retailers, so it took time to develop something unique.

One example: customers will be able to suggest their own rewards! Deshpande says “this is just the ground floor” so expect the program to expand and evolve over time.

Loyalty programs take a considerable investment to develop, launch, and maintain. What’s the ROI? The Zappos hypothesis is that focusing on increasing customer satisfaction will drive future success. Customer service is one way to do it, and they hope and expect that this new loyalty program will improve the online experience and have a similar positive impact on sales.

While they have some metrics to support this investment, I got the sense from Deshpande that this is more of a investment based on a philosophy or culture. The easiest thing to do is just roll out another me-too program that rewards frequent purchases. Zappos took the time to think more deeply about the kind of loyalty it wanted and is using the points to support that strategy. Smart.

Will It Work?

I got mixed reviews in feedback received from loyalty experts and friends who are Zappos shoppers.

Some expressed concerns about complexity. I tend to agree. There’s a lot to digest in the four levels and how points can be earned. I wouldn’t be surprised if the program is streamlined over time.

Customer-centric expert Denyse Drummond-Dunn of C3Centricity wasn’t wowed by Zappos lack of, well, “wow” in the program. She notes that while it’s “almost mandatory to compete with Amazon and other online retailers,” the points earned (e.g. ten reviews earns $1) seems like too much work for too little reward. Worse, the program lacks originality and should focus more “personalised service and individual recognition.” Ouch.

A family friend who loves Zappos for its selection of hard-to-find size 10AA shoes wasn’t impressed, either. What really drives her loyalty is the Zappos inventory, and the ability to order several pairs of shoes and return those that don’t fit, for free. Customer service is also a plus: “Zappos also has some of the best people on their customer service phone desk. They are cheerful and helpful and never sound burdened.”

As noted, the Zappos Rewards program isn’t targeted for already loyal shoppers like this (although I’ll be bet frequent shoppers will appreciate earning points for purchases anyway).

Loyalty expert Michael Lowenstein of CX consultancy Beyond Philosophy says if loyalty programs are designed properly, they “can be very profitable, and over an extended period of time.” The Tesco loyalty program pioneered by dunnhumby is one example of a program that helped a retailer understand its customers better and provide more targeted offers.

Fair point, but I’d add that Tesco fell on hard times when it leaned too hard on targeted marketing fueled by loyalty data, and neglected more fundamental loyalty drivers like customer service and competitive pricing.

CX consultant Ian Golding sums up nicely with this:

I personally still think there is a place for rewarding loyalty with your customer base – it aligns with the principle of having a strategy for ‘keeping’ customers. There is no doubt in my mind that giving customers the genuine ability to ‘get something’ as a result of their continuing relationship with your brand is a great way of enabling the customer to remember you first the next time they need to buy the products and services you provide.

Watch this Space

Here’s my take. It’s true that Zappos is late to the rewards game. Maybe they’re facing more competition or too many customers have complained about a lack of a points program.

My theory is that rewards/points programs have become a “hygiene” factor in loyalty — they are expected. You don’t get credit for offering them, only criticism when you don’t. So, even if Zappos doesn’t see much of an uptick in business, points-for-purchases is a core element that loyal customers expect.

But Zappos is clearly trying to do more than that. It will be interesting to see if points-for-engagement is a winning strategy. The activities mentioned may help, but they could also encourage “gaming” behavior that could undermine the brand — like fake reviews.

Still, I like the thinking that went into the launch, and expect that Zappos will figure out how to use it effectively as it gains more experience. Why do you think?

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6 Responses to Do Rewards Programs Drive Real Loyalty? Zappos Says “Yes” — If Focused on Engagement

  1. Michael Lowenstein October 11, 2016 at 1:15 pm (1312 comments) #

    Data from B2C loyalty programs, like Tesco’s Clubcard, can indeed help fuel successful, creative marketing; but, that said, these initiatives aren’t either a panacea or surrogate for key elements of experiential value delivery. Tesco is prima facie evidence of this.

    As discussed in my CustomerThink loyalty program post from a couple of years ago (http://customerthink.com/mckinsey-thinks-bland-generic-loyalty-programs-are-killing-business-and-they-may-be-right/), a lesson of Tesco is that any organization can watch the loyalty they’ve built through innovative programs and intelligent customer data leverage quickly vanish if they do not “mind the store”.

    Specifically regarding the Zappos program, we’re in general agreement. As noted when you asked me to review what they are doing,, most of this seemed fairly generic and standard (for Zappos), but there were a couple of interesting wrinkles in the program. In addition to the “free returns beyond the 365 day return policy”, which is somewhat Nordstrom-like, the Zappos press release had a stand-out benefit that caught my eye: “Opportunities to suggest your own Zappos Rewards and test new features” This is an element of inclusiveness and uniqueness which other rewards programs don’t have. It suggests more personalized and distinctive customer benefit. Customers always want more personalization, and when vendors do offer it, results can be very positive.

  2. Andrew Rudin October 11, 2016 at 2:44 pm (231 comments) #

    I have a different theory about Zappos’s loyalty program. They initiated it because it gets people talking. Other companies have taken a riskier approach. Starbucks ‘let’s talk about race’ campaign comes to mind. They were widely panned, but I don’t think anyone at corporate minded the media attention. Comparatively, a loyalty program seems a tame – though smart – offering for Zappos, assuming that part of their objective was to generate buzz.

    As I have commented before – as practitioners, we need to define loyalty. Otherwise, what distinguishes Zappos’s offer from a marketing promotion? I can’t tell the difference between that, and a loyalty program.

    To me, customer loyalty describes a customer’s resistance to competitive offers. In this scenario, a loyal Zappos customer would be less characterized as a marketing creation than a person who continues to prefer Zappos over competitive offerings, even when the Zappos doesn’t fully live up to its expected quality and performance. Sort of like the economics concept of demand elasticity.

  3. Bob Thompson October 11, 2016 at 11:57 pm (224 comments) #

    Andy, I don’t think Zappos created the program for “buzz.” There are some creative elements, but nothing that would go viral in my opinion.

    My take is that they are simply trying to add value to digital consumers and encourage them to engage, even when they are not purchasing. That’s a worthy goal, although may be difficult to pull off.

    Totally agree that companies could define what they mean by “loyalty.” For some, it just means retention — by any means necessary including holding customers hostage via contracts.

    For others, it means an emotional bond, even if you’re not a current customer. For example, I’m a loyal Southwest customer even when I’m not flying them, because I like the company and spread positive word of mouth. There, I just did!

    Still others confuse loyalty with a rewards or points program. As in, “We’re sending emails via our loyalty marketing program, so we must have loyal customers.” Maybe, maybe not. Marketing is a tactic, loyalty is a combination of behavior (continued/increased buying) and positive attitude (may lead to WOM).

    I hope that Zappos doesn’t make the same mistake that Tesco did, and forgets that true loyalty can’t be bought with a points program.

  4. Thomas Wieberneit October 13, 2016 at 12:14 am (226 comments) #

    Hi Bob, I believe that rewards programs can create loyalty, given that they are designed to create value for the customer. The main problem with most ‘loyalty’ programs around is that they are designed around making more money for the company – but from an inside-out (company) point of view, as opposed to an outside-in (customer) point of view. Means that they just create barriers for change and not ‘a feeling of strong support for someone or something’ (Merriam-Webster definition).

    Not knowing much about the Zappos program and its implementation it looks like Zappos goes into the right direction …

    2 ct from Down Under
    Thomas
    @twieberneit

  5. Teresa Allen October 17, 2016 at 5:52 pm (7 comments) #

    As a woman who wears hard to find size 10.5, I would agree with your friend who noted that some customers are loyal to Zappos due to inventory of hard to find sizes and ability to order several, try on and return at no cost. To me though, it is the combination of this service and inventory with a robust CRM that really brings it home to Zappos customers. In my customer service keynotes, I often tell the story of ordering some golf shoes from Zappos and exactly a year later receiving an email saying how its probably time to order a new pair of golf shoes and that the same brand/size is currently available! This was a true WOW as it demonstrated the CRM power behind the service which certainly drives loyalty far more than any points ever could.

  6. Ameer Ahmad October 30, 2016 at 4:22 pm (7 comments) #

    Interesting article. Loyalty program seems necessary nowadays. But what’s Zappos’ trying to do is unique. Costumers are more bonded through engagement and that will make them more loyal than just having an reward that won’t last long. Thanks for sharing tho.

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